Japan Country Profile

8/17/2019 Japan Country Profile

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Japan: Country Profile

Country Profile | 30 Oct 2015

KEY POINTS

n The economy will grow by 1.1% in 2016 after gains of 0.7% in 2015. Gains in

corporate profits, a modest rise in investment and an improving labour market

provide support. GDP grew at an annualised rate of 1.0% in the third quarter of

2015 meaning that Japan avoided a technical recession.

n At real prices, private final consumption fell by 0.9% in 2015 and an increase of

0.3% is forecast for 2016. Very slow growth in wages holds back consumption. The

minimum wage was raised by 2.3% in 2015 but it is so low that it affects only about

2 million workers and will have little impact on consumption.

n Unemployment was 3.4% in 2015 and it will stay at that level in 2016. The tight

market is due partially to shrinking labour supply. Companies are turning to female

applicants to fill job vacancies. Nearly one million women have joined the labourforce in the end of 2013. Wages finally began to show moderate gains in 2015.

n Japan can expect no more than feeble growth in the medium term. Real GDP will

rise by about 1.0% per year through 2020. Gains in corporate and household income

should offer some support. The recent conclusion of the Trans-Pacific Partnership

(TPP) trade agreement will also provide an additional boost to the economy.

Ch a r t 1 R e a l GDP Gr o w t h a n d P e r C a p it a GDP : 2 0 0 9 - 2 0 1 5

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2014 and 2015 are forecast. GDP per capita are in constant 2013 prices

FACTS

Area

364,600 square kilometres

Currency

Yen (¥ = 100 sen)

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Location

Located (at its nearest point) 150km east of the Korean peninsula and about 1,500

km northeast of the Chinese mainland, Japan is situated in the northern Pacific

Ocean with the Sea of Japan to its east. The country mainly comprises four

volcanic islands - Hokkaido, Honshu, Shikoku and Kyushu, of which Honshu is the

largest. There are also a considerable number of smaller islands.

Capital

Tokyo

GOVERNMENT

Head of State

HM Emperor Akihito (1989)

Head of Government

Shinzo Abe (2012)

Ruling Party

The Liberal Democratic Party leads a coalition.

Political Structure

Japan is a constitutional monarchy in which the Emperor Akihito plays a ceremonial

role. All political power is vested in a Diet (Parliament). Parliament includes a 480-

member House of Representatives elected by universal suffrage for a term of four

years, and a 242-member House of Councillors that serves a six-year term of office

with half of its members coming up for election every three years.

Last Elections

Elections to the House of Representatives were held in December 2014. The LiberalDemocratic Party took 291 seats and its coalition partner, the New Komeito Party

received 35 seats. Meanwhile, the Democratic Party won only 73 seats and the

Communist Party took 21 seats. Together, the Innovation Party and its coalition

allies took 45 seats. Independents captured eight seats and the remainder were

scattered among several minor parties. Elections to the House of Councillors were

held in July 2013. The Liberal Democratic Party and its ally, the New Komeito Party,

now hold 135 seats while opposition parties including the Democratic Party control

107 seats. Abe, the leader of the Liberal Democratic Party was re-elected as prime

minister by the House of Representatives in December 2014.

Political Stability and Risks

Japan's parliament approved two controversial bills that change the country's

security laws. The changes allow Japanese troops to fight overseas for the first

time since World War Two. The government argues that the move is necessary to

expand the role of the military in a doctrine called collective self-defence.

International Issues

Japan has long opposed North Korea's nuclear plans in exchange for desperately

needed energy supplies and some kind of security guarantee from the North's

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enemies. In 2015, Tokyo approved changes that expand the role of its military

abroad. The vote allows Japanese troops to fight overseas for the first time since

the end of World War Two.

Japan has a territorial dispute about the ownership of the four southern Kurile

Islands which were seized by the USSR after World War II and are administered by

Russia. The Senkaku Islands are administered by Japan but claimed by China and

Taiwan. China and Japan have a dispute regarding the exploration for natural gas in

the East China Sea and tensions have risen. In 2012, Japan purchased the

uninhabited Daioyu islands in the East China Sea which are also claimed by Beijing.

Japan also has a disagreement with South Korea over sparsely populated islands

known by Koreans as Dokdo and by Japanese as Takeshima. The islands are

controlled by South Korea.

Government Finance

Relative to GDP, Japan has the highest debt level of all advanced economies. Public

debt in 2015 totalled ¥1,229 trillion, equivalent to 247% of GDP. Public debt (in real

terms) rose by 1.6% in 2015. A gradual reduction through reforms including tax

hikes is planned over the next ten years. Tokyo raised various taxes in 2014 as part

of its effort to address the debt problem. Tax hikes planned for 2015 were delayed.

Japan's budget deficit was 6.2% of GDP in 2015 - the largest deficit of any

advanced country. Tokyo has pledged to realise a surplus by 2020 but that goal

seems unlikely. The government has admitted that it will need at least another ¥9

trillion to balance the budget (before interest payments) by 2020 as planned.

Spending on social security and welfare absorbed 31.5% of all government

expenditure in 2015, followed by spending on "other purposes" (30.0%).

Ch a r t 2 P u b l i c De b t : 2 0 0 9 - 2 0 1 4

Source: Euromonitor International

Note: Data are in constant 2014 prices

ECONOMY

Economic Structure and Major Industries

The agricultural sector is small and slowly contracting. The sector employs 3.5% of

the workforce. Efficiency is hampered by the small and scattered nature of

farmlands and high input costs. Domestically produced food items are extremely

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expensive. As part of its programme of structural reforms, the government plans to

consolidate Japan's inefficient rice farms and wean their operators from government

subsidies. Farms co-operatives are adamantly opposed to Japan's entry in the

Trans-Pacific Partnership (TPP). Tokyo will set up a task force to help Japan's

farmers adjust to the TPP.

Manufacturing contributes 17.6% of GDP. The sector presently employs 17.7% of

the workforce but the number of workers has been steadily falling. Japan's largest

manufacturing firms appear to be the worst affected by China's recent slowdown.

Their problems are a reflection of the relentless shift of manufacturers to cheaper

production sites and growing markets elsewhere in Asia. At the same time, many

Japanese companies are falling behind in technology innovation. The real value of

gross manufacturing output fell by 0.2% in 2015.

The tourist sector is benefiting from a cheaper yen. The real value of tourist

receipts rose by 4.7% in 2015 and growth of 4.6% is forecast for 2016. Bank

lending is near a four-year high, suggesting that the central bank's monetary

stimulus is encouraging consumer spending and investors. In 2015, retail sales have

been weak - rising at an annualised rate of less than 1%.

Overview of the Economy

Japan's economic growth was brought to a brutal halt in 2011 after the Great East

Japan earthquake and tsunami. The contraction was driven by sharp declines in

private consumption and stock building. Growth resumed in 2012 but the economy

contracted marginally in 2014, precipitated by a sales tax hike that took a huge bite

out of consumer spending. The economy continued its weak upward trend in 2015

when real GDP rose by just 0.7%. Weaknesses in demand and limited progress in the

implementation of pro-growth reforms were drags.

Many Japan's businesses lack the ability to finance innovation, at a time when

South Korea, Taiwan and China are establishing themselves as rivals in the high

tech industries. Net flows of FDI have been negative or have risen very little in

recent years. The emergence of China as a favoured destination for FDI was a

particularly important reason for the declining amount of capital going to Japan.

Japan's income inequality is worsening. One reason is that as the country ages, the

income of its elderly falls relative to that of wage earners. There are now seven

pensioners for every 10 salaried workers and the ratio is rising. Another is that the

profitability of large companies has been sustained but no similar trend exists among

small companies which are the main source of new jobs. Third, the number of

"irregular workers" has soared and now makes up around one-third of the workforce.

They earn less than half the pay of regular workers for the same jobs.

Foreign Trade

Exports account for a comparatively small portion of GDP. In 2015, exports

amounted to 15.3% of GDP, down from 16.1% in 2008. Measured in dollars, exports

fell by 9.2% in 2015. Gains of 2.0% are expected in 2016. The IMF suggests that

the poor performance is due in part to the fact that manufacturers are shifting

production overseas.

The USA, China and the EU-28 are Japan's major trading partners. Together,

Japan's exports to these three markets accounted for 47.6% of the total in 2015.

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Machinery and electrical equipment made up 33.3% of Japan's total exports in 2015.

In 2014, Japan and Australia agreed on a trade deal which will lead to lower tariffs

on imports of key products. Japan is also negotiating a pact with India and in 2012

launched free-trade talks with Canada. Japan is also a participant in the recently

concluded Trans-Pacific Partnership (TPP).

Japan's current account surplus was 3.2% of GDP in 2015 and it will stay at that

level in 2016.

Ch a r t 3 T o t a l Fo r e i g n T r a d e : 2 0 0 9 - 2 0 1 4

Source: Euromonitor International from national statistics/OECD/IMF

Economic Prospects

The economy will grow by 1.1% in 2016 after gains of 0.7% in 2015. Gains in

corporate profits, a modest rise in investment and an improving labour market

provide support. GDP grew at an annualised rate of 1.0% in the third quarter of

2015 meaning that Japan avoided a technical recession.

Deflation has been a problem for years but in 2015 prices rose by 0.8%. In 2016,

inflation is expected to be 1.0%. The central bank's target for inflation is 2% per

year. In an effort to encourage banks to lend, the central bank introduced a

negative interest rate of 0.1% in January 2016.

At real prices, private final consumption fell by 0.9% in 2015 and an increase of

0.3% is forecast for 2016. Very slow growth in wages holds back consumption. The

minimum wage was raised by 2.3% in 2015 but it is so low that it affects only about

2 million workers and will have little impact on consumption.

Unemployment was 3.3% in 2015 and it will stay at that level in 2016. The tight

market is due partially to shrinking labour supply. Companies are turning to femaleapplicants to fill job vacancies. Nearly one million women have joined the labour

force in the end of 2013. Wages finally began to show moderate gains in 2015.

Ch a r t 4 R e a l GDP Gr o w t h : 2 0 0 9 - 2 0 1 5

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Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2015 are forecast

Evaluation of Market Potential

Japan can expect no more than feeble growth in the medium term. Real GDP will rise

by about 1.0% per year through 2020. Gains in corporate and household income

should offer some support. The recent conclusion of the Trans-Pacific Partnership

(TPP) trade agreement will also provide an additional boost to the economy. Thepotential rate of growth is estimated to be 1.6%. To raise this measure officials are

working to increase the labour supply and further deregulate agriculture and

services.

The government's target for real growth in the medium-to- long term is 2% per year

but this will also require a process of fiscal consolidation. According to the IMF, a

fiscal adjustment equivalent to roughly 10% of GDP over the next decade is needed

to put public debt firmly on a downward path. Other policy changes are necessary

to raise the economy's growth potential though Tokyo has been slow to introduce

the necessary structural reforms.

Population ageing poses other problems. The rate of household savings is low

because retirees are spending more out of the wealth they accumulated in the

past. That trend should boost domestic consumption (long thought to be too low)

but it will also make it difficult to sustain aggregate investment without larger

inflows of FDI. Japan's workforce is presently contracting by almost 1% per year. In

response, Tokyo plans to increase support for families with children to boost the

fertility rate. Officials also appear to be moving gradually toward allowing a more

permanent form of immigration but are hesitant to openly acknowledge it.

BUSINESS ENVIRONMENT

Tokyo plans several measures in an effort to reduce public debt over the next 10

years. The personal income tax base is being broadened to raise revenue and

improve work incentives. In 2014, the government hiked the sales tax from 5% to

8%. A second hike in the consumption tax is planned for 2017.

In an effort to revive the economy, Japan intends to cut the country's corporate

tax below 30% in several stages with the first cut coming in 2016. The move should

spur investment. The government has also reformed agricultural co-operatives and

made modest progress on energy reform.

Foreign investors are deterred by high taxes, a lack of English language fluency and

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inflexible labour rules and regulations. To combat this situation, Tokyo will provide

accelerated visa-issuing procedures, set up special economic zones which offer

more tax breaks and provide subsidies to new companies establishing operations in

Japan. Firms in economic zones will also be able to hire and fire workers more easily.

T a b le 1 I n d i c a t o r s o f B u si n e s s En v i r o nm e n t : 2 0 1 6

Ease of Doing Business Rank (out of 189) 34

Starting a Business

Time (days) 10.5Procedures (number) 8

Dealing with Construction Permits

Time (days) 197

Procedures (number) 12

Getting Electricity

Time (days) 105

Cost (% of income per capita) 0

Registering Property

Time (days) 13

Cost (% of property value) 5.8

Employing Workers

Paid annual leave for a worker with 1 year of tenure (in working days) 10

Tax Rate

Total tax rate (% profit) 51.3Labour tax and contributions (% of commercial profits) 18.2

Time (hours per year) 330

Payments (number per year) 14

VAT (%) 5

Exporting

Time to export: Border Compliance (hours) 48

Cost to export: Border Compliance (US$) 305

Importing

Time to import: Border Compliance (hours) 48

Cost to import: Border Compliance (US$) 334

Protecting Minority Investors

Strength of minority investor protection index (0-10) 6.3

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Source: Euromonitor International based on the World Bank

Note: Data is sourced from the World Bank's Doing Business 2016. Doing Business

presents quantitative indicators on business regulations and the protection of

property rights - and their effect on businesses, especially small and medium-size

domestic firms. The data for all sets of indicators in Doing Business 2016 are from

June 2014 until June 2015 (except for paying taxes data which refers to January-

December 2014). Rankings are based on data sets across 189 countries.

ENERGY

Japan contains almost no oil reserves of its own but it is the world's third largest oil

consumer (after the US and China). Energy industries have undergone a period of

downsizing and consolidation. Energy intensity (energy use per unit of GDP) is

among the lowest in the developed world. The country's goal is to cut oil

consumption to 40% of total energy consumption by 2030 but that target is now in

question.

The country has modest amounts of natural gas reserves, with possibly more under

the seabed surrounding Japan. Unlike oil, demand for natural gas is still rising by

about 3-4% per year.

Ch a r t 5 P r i m a r y C o n su m p t i o n o f En e r g y ( % o f t o t a l ) : 2 0 1 4

Source: Euromonitor International from BP Amoco, BP Statistical Review of World Energy

SOCIETY

Population

Population began to fall around 2009 and in 2015 stood at 127 million. The median

age is 46.8 years - significantly higher than for other large economies in the region.

The steady ageing of Japanese society is a significant drag on economic

performance.

Resolving Insolvency

Time (years) 0.6

Cost (% of estate) 3.5

Getting Credit

Strength of legal rights index (0-12) 4

Enforcing Contracts

Time (days) 360

Cost (% of claim) 23.4

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In 2015, the number of those over 65 years amounted to 33.9 million. At that time,

this age group made up 26.7% of total population and the share will rise to 31.5%

by 2030. The government forecasts that 40% of the population will be of retirement

age by 2050.

The fertility rate was 1.5 births per female in 2015 and it will gradually rise in

coming years, reaching about 1.6 births per female by 2030.

Ch a r t 6 A g e P y r am i d i n 2 0 1 4 a n d 2 0 3 0

Source: Euromonitor International from national statistics/UN

Income and Expenditure

Japan's savings ratio amounted to 7.9% of disposable income in 2015 and it will

increase to 8.3% in 2016.

Consumer expenditure per capita totalled ¥2,263 thousand (US$18,699) in 2015.

The indicator is forecast to grow by 0.5% in 2016. In 2015-2030, health goods andmedical services, communications and transport will see the fastest growth in

consumer spending.

Total consumer expenditure (in real terms) will increase by 0.3% in 2016. In the

period 2015-2030, total consumer expenditure will grow at an average annual rate

of 0.7%. It will increase by a cumulative value of 10.8% during that period. Total

consumer expenditure will be 57.1% of GDP in 2016.

In 2015, disposable income per capita amounted to ¥2,462 thousand (US$20,340).

The indicator will grow by 0.8% in 2016.

During the period 2015-2030, total disposable income will increase by a cumulativevalue of 8.0% in real terms - growing at an average annual rate of 0.5%.

Ch a r t 7 P e r Ca p i t a A n n u a l D i s p o s a b l e I n c om e , S p e n d i n g a n d S a v i n g s Ra t i o :

2 0 0 9 - 2 0 1 4

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Source: Euromonitor International from national statistics/trade sources/OECD

Statistical Summary

2010 2011 2012 2013 2014 2015

Inflation

(%

change)

-0.7 -0.3 0.0 0.4 2.7 0.8

Exchange

rate (per

US$)

87.77 79.81 79.79 97.60 105.84 121.04

Lending

rate1.6 1.5 1.4 1.3 1.2 1.2

GDP (%

realgrowth)

4.7 -0.5 1.7 1.4 0.0 0.7

GDP

(national

currency

millions)

482,676,900.0 471,578,700.0 475,331,600.0 479,083,700.0 486,938,900.0 497,955,200.9

GDP (US$

millions)5,499,388.5 5,909,045.9 5,957,349.2 4,908,794.1 4,600,796.2 4,113,835.4

Birth rate

(per '000)8.4 8.2 8.1 8.1 7.9 7.7

Death rate

(per '000)9.4 9.8 9.9 10.1 10.3 10.6

No. of

households

('000)

51,950.5 52,234.6 52,494.1 52,716.0 52,884.9 53,002.0

Totalexports

(US$

millions)

769,875.4 822,572.6 798,633.3 714,601.7 690,934.9 624,938.6

Total

imports

(US$

millions)

694,151.4 855,007.0 886,051.0 832,335.5 813,053.5 648,494.0

Tourismreceipts

(US$

millions)

13,224.0 11,000.0 14,162.8 14,607.0 - -

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Imports and Exports

Tourismspending

(US$

millions)

27,950.0 27,262.0 29,150.9 28,023.1 - -

Urban

population('000)

115,944.1 116,640.9 117,216.9 117,764.7 118,242.0 118,580.6

Urbanpopulation

(%)

90.5 91.3 91.9 92.5 93.0 93.5

Populationaged 0-14

(%)

13.2 13.1 13.0 12.9 12.8 12.6

Populationaged 15-64(%)

63.8 63.6 62.9 62.1 61.3 60.6

Population

aged 65

(%)

23.0 23.3 24.1 25.1 26.0 26.7

Malepopulation

(%)

48.7 48.7 48.6 48.6 48.6 48.6

Female

population

(%)

51.3 51.3 51.4 51.4 51.4 51.4

Life

expectancy

male

(years)

79.6 79.4 79.9 80.2 80.4 80.5

Life

expectancy

female(years)

86.3 85.9 86.4 86.6 86.7 86.9

Infantmortality

(deaths per

'000 live

births)

2.3 2.3 2.2 2.1 2.1 2.0

Adultliteracy

(%)

99.9 99.9 100.0 100.0 100.0 100.0

Major export destinations

2015

Share (%) Major import sources

2015

Share (%)Exports (fob) to Asia

Pacific47.9

Imports (cif) from Asia

Pacific45.2

Exports (fob) to North

America21.3

Imports (cif) from Africa

and the Middle East14.8

Exports (fob) to Europe 12.2 Imports (cif) from Europe 14.7

Exports (fob) to Other

Countries6.0

Imports (cif) from North

America12.1

Exports (fob) to Africa and

the Middle East5.5

Imports (cif) from

Australasia5.9

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Japan Country Profile

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